Count the events, not the instruments
Real diversification is measured by how many independent events can hurt you, not by how many symbols sit in the account. Five instruments all sensitive to the dollar are one risk under five names.
And in short-term trading diversification meets a practical limit: more simultaneous positions hold more margin, lower the margin level, and bring the stop-out closer — so what you thought was spreading risk narrows your defensive buffer instead. This is why cutting size is often more useful than adding positions.
Written risk versus exposed risk
This family uses the same reference account: $1,000 risking 1%, or $10 a trade. The shared idea is that real risk is not what you wrote on a single trade but what is actually exposed when the market moves.
Two correlated positions at 1% each are not 2% spread across two trades; they may be a single 2% risk. Measuring that difference is what these pages do.
A worked example
On the reference account, a "diversified" choice of five positions on correlated instruments at 1% risk each.
Written risk is 5%, or $50, and real risk is 5% on a single event because they move together. Worse, held margin is now five times larger, so the margin level falls and liquidation moves closer.
A single position at 2% risk has lower written risk, lower real exposure, and less margin held. Lower on three measures at once — which is the difference between spreading risk and multiplying it.
Common mistakes with this term
- Counting instruments instead of the independent events that can cost you.
- Overlooking that each extra position holds margin and brings the stop-out closer.